Submission to the Senate Committee on Australia – US Free Trade Agreement

Professor Peter Drahos

Regulatory Institutions Network

ResearchSchool of Social Sciences

AustralianNationalUniversity

INTRODUCTION

This submission focuses on the intellectual property chapter of the FTA, including its implications for the PBS. There are four types of costs that are created by this chapter:

  1. Bargaining and strategic costs;
  1. Regulatory sovereignty costs;
  1. Competition costs;
  1. Dynamic efficiency costs

Depending on the quality of economic modelling some of these costs may be picked up in a conventional modelling exercise. However, not all will be because they are costs that relate to dynamic processes. This submission provides examples of each of these types of cost, but it does not, for reasons of length, cover all cases in each category.

ASSUMPTIONS OF THE SUBMISSION

The arguments in this submission are underpinned by the assumption that intellectual property rights (IPRs) are not natural rights or primary human rights.[1] Rather they are instrumental tools that governments use to regulate free markets, because without that regulation markets would not allocate an optimal level of resources to invention and creation. The assumption that IPRs are essentially regulatory in character has been part of English and Australian law for a long time. As the High Court pointed out in Victoria Park Racing v. Taylor, IPRs are “special heads of protected interests” that form an exception to general principles and values of market competition.[2]

One of the fundamental things that the US is attempting to accomplish with this and other FTAs is to turn IPRs into a natural right of investment. Essentially the US is creating a new paradigm in which the granting of monopoly rights is no longer seen as something that is special or exceptional, but rather something that is a permanent feature of the regulation of global knowledge markets. In this new paradigm, it will be US multinationals that will be the private regulators of global knowledge markets.[3]

BARGAINING AND STRATEGIC COSTS

Historically, Australia’s strategy on international standards of intellectual property has been based on the fact that it has to participate in the international IPR regime, but its interests in that regime are those of a net intellectual property importer. Summarizing a history of indigenous policy development that goes back to the 1980s and the reports of the Industrial Property Advisory Committee of that time[4], the position that Australia developed was to abide by but not argue for an extension of multilaterally agreed standards of IPRs, or, if necessary, agree to an extension of such standards if there were gains to it in other sectors (for example, agriculture). This strategy was based on a commitment to multilateralism. In the Uruguay Round of trade negotiations (1986 –1993) Australia supported the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) while forcefully pushing its interests in agricultural trade liberalization through its leadership of the Cairns Group.

By signing the FTA with the US, Australia has signalled a fundamental change in the strategy that it has developed over the last few decades. In specific terms, the FTA has the following bargaining or strategic costs:

  1. The FTA gives the US standards on IPRS that it would not have been able to obtain in the WTO or would have had to make considerable concessions to obtain.[5]
  1. The FTA throws away IPRs as a bargaining tool in the WTO with respect to other countries, most notably Europe and Japan, because the TRIPS MFN clause picks up the Australia - US FTA.[6] In other words, Japanese and European IPR owners also benefit from the IPR chapter.
  1. The FTA aids the US strategy of using FTAs to divided and conquer countries that are interested in agricultural trade liberalization. The table below shows that both Cairns Group members and G-20 members are agreeing to FTAs (in the latter case the price of the FTA is departure from the group), thereby undermining their effectiveness as collective entities in multilateral bargaining over agriculture.

Table 1 - Dividing and Conquering – the use of FTAs by the US to break up developing country groups.

G20 / Ex –G20 / Cairns Group / FTA with US?

Argentina*

/ Y / Y
Australia / Y / Y
Bolivia / Y / Y / Proposed

Brazil*

/ Y / Y
Canada / Y / Y (NAFTA)

Chile

/ Y / Y / Y

China*

/ Y
Colombia / Y / Y / Proposed
Costa Rica / Y / Y / Y (CAFTA)
Cuba / Y
Ecuador / Y / Proposed
Egypt / Y
El Salvador / Y / Y (CAFTA)
Guatemala / Y / Y / Y (CAFTA)
Honduras / Y (CAFTA)

India*

/ Y
Indonesia / Y / Y
Malaysia / Y / Proposed
Mexico / Y / Y (NAFTA)
New Zealand / Y
Nicaragua / Y / Y(CAFTA)
Nigeria / Y
Paraguay / Y / Y
Pakistan / Y
Peru / Y / Proposed
Philippines / Y / Y

South Africa*

/ Y / Y / Y (SACU)
Being neg.

Tanzania

/ Y
Thailand / Y / Y / Proposed
Uruguay / Y
Venezuela / Y
Zimbabwe / Y
19 / 7 / 17

* Leaders of the G-20.

REGULATORY SOVEREIGNTY COSTS

In the past states have maintained very close control over their sovereignty over IPRs. For example, a survey of national intellectual property laws of more than 100 countries by the World Intellectual Property Organization in the 1980s revealed a huge diversity amongst states on fundamental matters such as pharmaceutical patenting, patenting of software, plants and animals and so on.[7]

The effect of the IPR chapter in the FTA is to reduce the capacity of the Australian government to define standards of intellectual property regulation that suit Australia’s industrial and public policy needs. Below are three of many possible examples.

Utility – Utility is a requirement of patentability. The idea behind the requirement is that the invention should have some practical use. Utility has proved difficult to apply in the context of the biotechnology industry where often patent applicants claim information the effects and application of which are not really known by them. The FTA obliges Australia to provide that an invention is useful if it has “specific, substantial and credible utility” (See Article 17.9.13). This wording picks up the Utility Guidelines that were issued by the US Patent and Trademark Office in January of 2001.[8] In effect, Australia has tied itself into a US standard of utility and its interpretation. Whether or not this suits Australian industry, especially the biotechnology industry, is an open question.

Compulsory licensing. Compulsory licensing is an important regulatory tool that allows governments to bargain effectively with multinational companies in key sectors such as the pharmaceutical sector.[9] It is important to note that the US has over the years issued compulsory licences affecting many thousands of patents with no visible effects on investment.[10] The FTA severely restricts the capacity of government to issue a compulsory licence compared to the TRIPS standard.

The compulsory licence provision also illustrates another point about the FTA. Almost certainly the US will not comply with this more restrictive standard in its own domestic law. There is a good argument that it does not comply with even the TRIPS standard of compulsory licensing. No smaller country, however, will take the US to dispute resolution in the WTO over this matter. In short, domestically the US will run an IPR regime that is more liberal in terms of access while insisting that its trading partners run an IPR regime that is more restrictive of access than its domestic one.

Parallel importation. This issue proved highly controversial in TRIPS and so for that reason TRIPS does not set a standard of parallel importation. Article 17.9.4 of the FTA allows for the possibility that in the case of patents, the patent owner may contractually restrict the importation of patented products that it has placed on the market. This is essentially the current Australian position. However, if Australia wished to change this position it would find itself in a trade dispute with the US. It is worth noting that the Ergas Committee observed that in the context of copyright consumers would be better off without restrictions on parallel importation.[11] The World Health Organization expressly recommends that countries not place restrictions on parallel importation.[12] This may also be an area where the US domestic position does not square with the standards it is seeking to impose on other states.

COMPETITION COSTS

A basic tension arises between the competitive process, which depends on the diffusion of information, and intellectual property, which enables the private appropriation of information.[13] IPRs function as a form of private tax on other competitors in the market place. They allow the holders of those rights to collect royalties and fees from competitors and consumers. The only justification for allowing these private taxes is if there are clear dynamic efficiency gains. In the case of IPRs in the FTA there are clear losses in terms of the interference with competitive markets, but with either no corresponding gains or uncertain gains. There are many examples of this in the FTA including the following:

Application to existing subject –matter. The FTA applies to all IPRs in existence upon the date that the FTA comes into operation (See Article 17.1.9). Extending the benefits of the FTA to owners of existing IPRs carries with it only social welfare losses. In the case of Australia, Gruen et al estimated the social welfare losses of a similar provision in TRIPS and only for patents.[14] They concluded that the welfare losses might be as high as $3.8 billion.

Since that study patenting and the use of copyright by US, European and Japanese companies have gone up dramatically.[15] It follows that the costs of extending the benefits of the FTA to IPRS in existence in 2004 is likely to be much higher than the estimates in the Gruen study of 1996. It is also worth asking whether the losses in the IPR Chapter alone throw the overall result of this FTA into the debit column for Australia.

Barriers to entry. IPRs form one of the most important barriers to entry in markets.[16] By increasing barriers to entry the price effects of competition may be delayed or, depending on the industry structure, may never arrive. IPRs act as a barrier to entry in many industries (for example, computer software, semi-conductor chips, publishing). The IPR chapter of the FTA contains US style standards of copyright, trade mark and patent protection that will over time affect a number of Australian industries. An example below relates to pharmaceuticals.

Patents and the Generics Industry

In 1998 Australia in response to trade pressure from the US amended its Therapeutic Goods Act to recognize data exclusivity for a period of five years for therapeutic goods containing an active component.[17] This was not required under TRIPS. Argentina, which was also the subject of trade pressure on data exclusivity, refused to bow to US pressure on the issue. This FTA goes much further than TRIPS in the area of pharmaceuticals. The TRIPS plus concessions that Australia made in 1998 have simply resulted in the US and its large pharmaceutical industry asking for and gaining more concessions. Examples of this include:

  • Article 17.9.8 provides for the possibility of further extension of the patent term, including for pharmaceutical patents. This extension would be in addition to any extension that Australia already provides under section 70 of the Patents Act for pharmaceutical patents.
  • The restrictive provision on compulsory licensing (see the earlier discussion) has more serious long-term implications for access in the pharmaceutical sector than in other sectors. Brazil’s use of its compulsory licensing laws to meet its HIV/AIDS crisis has been a crucial factor in its successful management of this particular public health crisis.
  • The provisions on data exclusivity have been extended to apply to agricultural products for ten years (not required by TRIPS) and include new uses of existing products (not required by TRIPS).
  • The trend of the IPR Chapter to foreclose future regulatory options for Australia is illustrated by Article 17.10.1(c). The aim of this provision (not required by TRIPS) is to stop third persons (eg generic companies) from using marketing approvals in other countries as the basis for seeking marketing approvals in Australia.
  • Article 17.10(5) links data exclusivity and marketing approval to the term of the patent. In effect, Australian authorities will be required to track and interpret patent product and use claims of patent owners (these claims need not necessarily be valid, that being a matter for the courts) and take steps to prevent the marketing of those patented products and uses.

Medical authorities will almost certainly not have the expertise to deal with problems such as overly broad patent claims. This kind of provision creates enormous advantages for large pharmaceutical companies and provides an incentive for broad claiming. The principle that it is better to have a weak patent in strong hands rather than a strong patent in weak hands applies here. It is very likely that this provision will make it much more difficult for generic companies to enter the market.

Another crucial issue is the relationship between this provision and compulsory licensing. If this provision continues to operate in those cases where a compulsory licence has been issued there will be no point in applying for one because marketing approval will still be a matter for the patent owner’s consent. This would also seem to preclude Australian generic manufactures from taking advantage of the WTO Doha Declaration and Decision on Implementation of Paragraph 6. The WTO scheme relies on the issue of compulsory licences and is intended to allow states with pharmaceutical manufacturing capabilities to help address the needs for medicines by developing countries.

Throwing away export opportunities

Other states such as India and Argentina are resisting US trade pressure to comply with rules that favour US industries at the expense of their domestic industries. Argentina and Brazil have at different times both rejected demands by the US to change aspects of their domestic intellectual property systems. India has taken full advantage of the transition rules in TRIPS in order to avoid disadvantaging its pharmaceutical and chemical industries. It is also a reasonable assumption that the Indian pharmaceutical and chemical industries, which have strong export interests, along with the Indian government will take full advantage of the flexibilities available to them under the current IPR regime. Canada also has draft legislation before its Parliament (Bill C-9) that implements the Decision on the Implementation of Paragraph 6 of the Doha Declaration. This legislation offers Canadian generic companies export potential for medicines related to the HIV/AIDS crisis. These states are keeping a weather eye on US attempts to set the rules of game and doing their best to preserve export opportunities for their industries. In Australia the acceptance of this FTA suggests that the Australian attitude amounts to one of meek compliance with the wishes of US multinationals.

DYNAMIC EFFICIENCY COSTS

Australia’s concessions in the IPR chapter come at a time when there is an emerging view within the US that IPR protection has gone too far. This debate has been triggered by various abuses of IPRs (witness the antitrust litigation brought against Microsoft or the many class actions being brought against US pharmaceutical companies alleging abuses of the patent system). The Federal Trade Commission in recent hearings found widespread concern in the US that the patent system is failing.[18] Industry figures from the computer software, hardware and internet business have all expressed frustration at the diversion of time and resources to the patent system in the form of litigation and establishing defensive portfolios.

Australia has signed onto a set of US standards in the FTA at a time when there is considerable doubt in the US about the suitability of those standards for a truly dynamic and effective knowledge economy.

IPRS and DISPUTE RESOLUTION

One of the neglected aspects in the public discussion surrounding the FTA has been the arrangements for dispute resolution to be found in Chapter 21 of the FTA. There are six crucial points to make concerning this Chapter:

  • Australia as a medium size trading entity should be supporting a multilateral approach to dispute resolution and in particular seeking to influence the evolution of WTO law. It should not be participating in the proliferation of non-transparent bilateral fora that FTAs such as this one represent. FTAs create forum shifting opportunities for the US.
  • At a practical level it has to be asked where Australia’s chances of success in trade litigation are likely to be the best – in bilateral or multilateral fora? The US has a highly sophisticated public-private partnership system for trade litigation that depends on, amongst other things, the resources of more than 80,000 US trade associations.[19] Australia best chances against this system of litigation are in the WTO rather than in a one-on-one contest.
  • The remedies in Chapter 21 include the possibility of cross-retaliation and this obviously favours the Party with the larger market.
  • The Chapter allows for submissions from “nongovernmental persons”. In practical terms this may do more to enhance the participation of large corporations in disputes than any other actor. Similar kinds of proposals by the US in the WTO have been resisted by many countries because of fears about the practical effects of the proposal.[20]
  • Chapter 21 expressly allows the possibility of a non-violation nullification and impairment complaint for IPRs. In other words, a US intellectual property owner could instruct the US to bring an action against Australia where Australia had taken an action that resulted in a lessening of the economic value of the relevant IPR (for example, by issuing warnings about a patented biotechnological product).
  • Chapter 21 offers the US an opportunity to influence the development of Australian domestic law, including intellectual property. It can argue that particular decisions of our courts represent a systemic failure to protect or enforce intellectual property rights and therefore this warrants a dispute resolution action. This FTA creates the real possibility that the US rather than Australian courts will have the final say on vital areas of domestic law.

[1] See Peter Drahos, ‘Intellectual Property and Human Rights’ [1999] (3) Intellectual Property Quarterly, 349-371.